What are we looking for?
We’ve looked at stocks with low price-to-book-value multiples many times over the years of Number Cruncher, as we search for evidence of stocks that are undervalued. The book value of a stock is, basically, a company’s assets minus its liabilities; to get the price-to-book-value ratio, you take the per-share book value and divide it into the share price.
When the ratio is significantly above 1 (i.e. the share price is higher than the book value), it implies a stock is overpriced. When it’s significantly below 1, the stock appears underpriced relative to its underlying assets.
But, as my colleague Darcy Keith pointed out in this column last fall, sometimes a stock can trade below their book value for a reason; it can be a sign of a distressed situation, or a company with underlying fundamental weakness. A key symptom could be a lack of profitability.
With that in mind, we seek stocks that are priced below their book value despite turning profits – on the premise that these may be stronger candidates as value picks.
We start with S&P/TSX composite stocks with a price-to-book below 1. Then we screen for companies that were both profitable over the past 12 months and are expected, based on analysts’ consensus forecasts, to be profitable over the next 12 months.
We’ve also included the price change over the past 12 months, the price-to-earnings ratio based on forecast earnings over the next 12 months, and the forecast earnings growth rate over the next two years (where available).
What we found
Just 16 S&P/TSX stocks meet our price-to-book and profit criteria. All of them are down from their year-ago price levels – in many cases, significantly.
Sherritt International Inc. has the lowest price-to-book among stocks that also meet our profit criteria. Sherritt’s P/E is also relatively low, and its two-year growth prospects look solid – making a case that this may be a genuinely undervalued stock.
Note that troubled Research In Motion Ltd. also meets our criteria, after a 74-per-cent price decline from a year ago. However, the growth outlook over the next 24 months is among the worst on the list – symptomatic of the company’s struggles and, no doubt, a contributor to its weak share value.